HBS Prof. Rakesh Khurana: B-schools may not be beneficial to society

Graduate School Business School - MBA
21

<p>The_Prestige, I doubt that anybody is disputing that when the final reckoning of the Great Recession is finally compiled, the investment banks will be ranked among the most culpable of actors. But still the question remains whether business schools, or perhaps just the subset of the top-ranked B-schools, also bear some culpability as well, albeit certainly not as much culpability as the investment banks themselves. </p>

<p>There is no doubt that business schools supply a product in high-demand in the form of MBA graduates who take jobs in investment banks. But I would argue - and I suspect that Khurana would agree - that not all market demands ought to be met with a supply, and certainly that society perhaps ought not to invest tax subsidies into providing such supply. For example, tobacco companies have an insatiable demand for ever-more-ingenious marketing experts who can devise intricate advertising campaigns to convince more people to smoke. Should we provide tax incentives to educate people to meet that demand? Brutal dictatorial regimes such as North Korea and Syria pay handsomely for surveillance and internal security technologies with which to repress their own people. Should we provide tax incentives for firms to supply that demand? </p>

<p>I think there is little dispute that tobacco firms and dictators inflict tremendous harm upon society, which is why society probably should not subsidize the supply of the raw materials that they use. Unfortunately investment banks have demonstrated that they can likewise inflict tremendous harm upon society as well.</p>

<p>To be clear, obviously the tobacco companies themselves bear the brunt of the blame for the epidemic of lung cancer and emphysema that they’ve unleashed upon the world. But perhaps they wouldn’t be quite so effective if they weren’t supplied with many of the most sophisticated psychologists and marketing experts in the world, many of whose education and training was subsidized by the taxpayers.</p>

22

<p>

</p>

<p>Even if it’s true that MBA programs serve only as a screening/signalling mechanism rather than an educational and value-shaping experience, that in itself might be sufficient reason to prevent that mechanism from operating. For example, we may not want schools to efficiently screen for the best raw marketing talent for tobacco firms, which will then be employed to produce marketing campaigns to convince more people to smoke. We may not want this even if the schools provide no actual marketing/psychological education for those students but merely serve solely as a labor-market screen. Society might be better off with certain labor markets operating inefficiently. An inefficient labor market for marketers might mean that tobacco firms would hire some incompetent marketers who might actually reduce the number of smokers in the world (which would be a boon for society). Similarly, if investment banks were to hire less ‘talented’ people, they might be less capable of discovering and exploiting clever regulatory loopholes that conceal risk that eventually necessitate unprecedented taxpayer bailouts.</p>

<p>But we should also not underestimate the ability of business schools to shape values. Certainly I agree with you that if somebody is adamant about behaving unethically, no amount of ethical training will dissuade him. However, the concern is that<br>
business schools can and have redefined what ethical behavior actually means. For the few decades, business schools have become enamored with not only neoclassical economics, but specifically narrow, shareholder-centric view of the firm where increasing the short-term share price is the only goal of managers. Employees don’t matter, customers don’t matter, and certainly society at large doesn’t matter as long as the share price increases. Is it ethical to sell a balloon-payment negative amortization mortgage that may actually be dangerous to my customers? Who cares as long as the stock price increases. Should I exploit a legal loophole to construct an off-balance-sheet vehicle to conceal losses to my investors? Who cares as long as the stock price increases. And should I surreptitiously inflate the hidden risks taken by my firm, knowing that the taxpayers will likely bail me out if things go awry? Again, who cares, as long as the stock price increases. </p>

<p>Hence in one stroke do business schools encourage students to dismiss their own ethical qualms as irrelevant. Much of the fallout we see today likely stems from businessmen not knowing that some action is unethical and deciding to partake anyway, but rather by them not even believing their actions to be unethical in the first place.</p>

23

<p>sakky, these are very idealistic aspirations – which doesn’t mean we as a society shouldn’t strive to achieve them – but they are idealistic nonetheless.</p>

<p>do all MBA grads follow the money? not necessarily. but frankly, most do. in other words, most grads try to get the highest paying job that they can (as long as they feel they can do it adequately, have reasonable career prospects, have a certain level of interest etc). and why not? they paid a handsome sum for b-school, they should absolutely get their fair market value.</p>

<p>now, here is the rub. where is the money? sure “feel good” companies like Google and Apple make headlines today, but who knows where those companies will be 10, 15, 20 years from now? I can assure you that companies like Exxon Mobile, Anheuser Busch, Philip Morris will be around. now that’s not to say all oil or tobacco companies are bad (well, maybe not the oil companies). my point is, these companies are cash cows, and that is where the money trail begins and ends. (the cash from these companies line pockets all along the Beltway and effectively are the puppet masters that run Washington).</p>

<p>of course, if you asked a person if they could earn the same money for selling children’s vitamins as they could selling cancer sticks, any decent human being would opt for the former. but sadly, cancer sticks make a lot more money, and a pack of Bud makes more money than Sunny D.</p>

<p>similarly, even if you had b-schools indoctrinate their graduates about the importance of business ethics (and they absolutely should) does that necessarily mean that when they land that Goldman Sachs job they are going to go around balking at orders because something doesn’t pass the ethics litmus test? well, they could. but they won’t be around for very long, and let’s face it, there is a long, long line of people waiting to fill that spot no questions asked. </p>

<p>so, again, i’m not saying that b-schools shouldn’t take this mandate seriously – they should – my point is that i’m not all that convinced that it will have a material impact in the real world… it’s not like Johnny is going to be at the cusp of committing fraud and then think back to his b-school days and think “gee, Professor Goody Two Shoes wouldn’t approve, I better put this cookie back in the jar…”</p>

<p>the problem it seems to me is a system where there are little to no consequences for bad behavior. if a guy commits a crime and gets caught, he gets punished. but if a bunch of investment banks nearly send the economy into a depression, who pays? where is the accountability? where were the regulators? where were the credit agencies? no, they get a free handout from the gov’t vis a vis the Fed (which they pay back in a matter of mere months no less) and no one gets punished. If that isn’t the root of the problem then I don’t know what is.</p>

24

<p>The_prestige, again, nobody is disputing that MBA students will attempt to maximize the return on their educational dollars, nor is anybody disputing that the root cause of the financial crash lies with the investment banks themselves. Those are not the issues at hand.</p>

<p>Rather, the issue at hand - as per Khurana’s argument expressed in the original post - is whether society should subsidize the production of the raw materials that the investment banks use. After all, society should only subsidize those activities that actually clearly benefit society. As a case in point, perhaps we should stop subsidizing tobacco farmers and instead shift those subsidies to the production of fruits and vegetables. </p>

<p>By the same logic, if business schools continue to produce MBA graduates who populate the investment banks who wreak havoc upon the economy, or produce academic research papers that serve to evangelize and legitimize financial practices that exploit regulatory loopholes and thereby generate hidden risks that taxpayers will eventually be forced to bear, then, at the very least, perhaps those business schools should not enjoy those tax subsidies. </p>

<p>As a baseline example: the campus of Harvard Business School sits on a luxurious slug of prime Boston riverside real estate of a comparable size to the entire Harvard main campus in Cambridge. Perhaps they should have to pay property taxes on that land just like any other normal Boston property owner.</p>

25

<p>sakky, i do get the point about the subsidies, but frankly, it will never happen – the system is far too entrenched and the evidence isn’t obvious enough to warrant such a drastic move.</p>

<p>but compare that to the hundreds of billions of taxpayer dollars that go to companies that go to the government hat in hand asking for and receiving bail outs time and time again (from the auto industry to the banks) – the money you are talking are peanuts compared to this. if the point is to maximize value for taxpayer dollars (or minimize unnecessary spending) then shouldn’t we aim for the big fish? why not use that taxpayer money to invest into industries that can create more sustainable jobs for Americans? why not use that money to invest into industries and technologies where we can actually compete (biotech, cleantech, etc.) rather than in sunset industries where we have long ceded any competitive advantage or industries that operate with complete disdain for the average citizen and the payout scale is way disproportionate to what they actually add to society?</p>

<p>why do companies / banks that act irresponsibly get a free pass? where is the accountability? and, more to the point, why do we have to pay for it?</p>

26

<p>

I hate to be Captain Obvious, but did you realize the title of this sub-forum is… “Business School…”?</p>

27

<p>^ are we not talking about business?</p>

28

<p>No, we’re talking about “business schools”. I used some toilet paper earlier today and had to go out to resupply myself. Business was conducted. Would you like to discuss that as well?</p>

29

<p>

</p>

<p>how very appropriate, this area seems to be your calling. please stick with it.</p>

30

<p>

</p>

<p>Well, if you really want to talk about the truly big fish, I would argue that the financial services industry and the auto industry, for all of their malfeasance and incompetence at least never produced a product that directly physically harmed anybody. {Granted, toxic securities that instigated the financial crash have surely indirectly physically harmed people by inflaming worldwide social strife, but the harm was never direct.} Tobacco companies, on the other hand, produce a product that directly wreaks tremendous physical harm; smoking is the leading cause of preventable deaths in the country. While granted, some people would have always chosen to smoke, it is also surely true that plenty of other people were induced to smoke through savvy marketing. Tobacco firms historically designed some of the most memorable, award-winning marketing campaigns ever made. Just think of all of the people who would still be alive - lung cancer was a rare disease until the dawn of widespread smoking - if not for ingenious tobacco marketing. </p>

<p>Yet we as society apparently can’t even really stop tobacco marketing, as for all of the ostensible restrictions upon various marketing outlets such as TV ads or sports sponsorship bans, the fact is, the tobacco industry still spends near-record sums on marketing every year, and those dollars are clearly going somewhere. Indeed, tobacco firms nowadays are basically little more than just pure marketing arms, as they perform relatively little true product innovation, and I suspect that their supply-chain operations had been optimized long ago. And this is regarding a product that, had it been invented today, would have been immediately banned under our consumer protection laws as being unsafe. {Isn’t it interesting that the government can force Toyota to recall millions of cars for unsafe accelerator/floormats despite the fact that to date not a single death has been clearly attributed to those problems, yet the government is apparently powerless to compel tobacco firms to recall their products despite their clearly unsafe nature.}</p>

31

<p>sakky, agree 100% with the above. i would add though that when someone loses their life savings or their pension or their home due to fraud and / or irresponsibility, i can’t think of something that can be more debilitating to a human being / family than that kind of damage (as it effects people on so many levels, socially, opportunity costs, etc.)</p>